Public companies can breathe a sigh of relief, at least for now, that the Securities and Exchange Commission's 14a-8 regulatory process for excluding shareholder proposals remains intact.

On Thursday, the Fifth Circuit Court of Appeals dismissed an appeal by conservative advocacy group the National Center for Public Policy Research that sought to vacate a no-action letter the SEC sent to Kroger Company about a shareholder proposal the center had submitted.

Case Background

The proposal—submitted for inclusion in Kroger's 2023 proxy materials—requested that Kroger issue, in pertinent part, “a public report detailing the potential risks associated with omitting ‘viewpoint’ and ‘ideology’ from its written equal employment opportunity (EEO) policy.

Kroger initially declined to include the proposal in its proxy statement, concluding that the proposal was excludable because it “relat[ed] to the company’s ordinary business operations.” 

Kroger notified the SEC of its intention to exclude the shareholder proposal from its proxy statement and SEC staff responded with a no-action letter agreeing that Kroger had “some basis” for excluding the proposal because it “relate[d] to, and [did] not transcend, ordinary business matters.”

The center asked the SEC staff to reconsider its decision and even requested review by the SEC’s commissioners, but was unsuccessful. It then appealed directly to the Fifth Circuit Court of Appeals, alleging that the SEC engaged in viewpoint discrimination and failed to maintain its neutrality. The center argued that the staff’s no-action letter made the center’s proposal “less effective by preventing [it] from receiving votes” and “chill[ed] [its] speech by discouraging [it] from making proposals.”

Interestingly, a few weeks after the center filed its appeal, Kroger filed its 2023 shareholder proxy materials, which included the center’s proposal, despite its initial position to exclude it. The center’s proposal received less than two percent of the votes cast at Kroger’s 2023 annual meeting and accordingly failed.

The SEC moved to dismiss the center’s appeal on two jurisdictional grounds. The first being mootness, SEC argued that the center received the relief it sought after Kroger included the center’s proposal in its 2023 proxy materials. The other basis for dismissal was the court’s alleged lack of subject matter jurisdiction over the challenged no-action letter. According to the SEC, the no-action letter was informal and nonbinding staff advice, not a “Commission order,” so the court has no authority to review the merits of the center’s challenge.

The Circuit Court Ruling

The Fifth Circuit ultimately agreed with the SEC's arguments and dismissed the center’s appeal.

First, the court rejected the center’s argument for application of the “capable-of-repetition yet-evading-review” exception to the mootness doctrine, which is narrowly limited to situations where “(1) the challenged action is in its duration too short to be fully litigated prior to its cessation or expiration, and (2) there is a reasonable expectation that the same complaining party will be subjected to the same action again.” 

The court found that even if the litigation period was brief, the center failed on the second prong because it could not “show either a ‘demonstrated probability’ or a ‘reasonable expectation,’ . . . that it will be subject to the same unlawful governmental action.”

There was no reasonable expectation that what happened in 2023 would recur in the future, the court concluded, noting that by rule, Kroger need not include the center’s proposal for the next three years because it attracted less than five percent of the votes cast. Furthermore, even if the center submitted the same proposal in the future and Kroger again chose to exclude it, there would be an independent procedural ground for Kroger’s decision to do so.

Alternatively, the court noted that given the proposals scant support in 2023, the company might instead choose to include the center’s proposal to avoid potential litigation. In either case, the court could “only speculate” about Kroger’s future actions.

The court rejected the center’s argument that the staff’s no-action letter will empower other companies to reject similar proposals by the center, finding such an argument to be purely theoretical.

The Fifth Circuit panel also agreed with the SEC's second argument that the court lacked subject matter jurisdiction over the challenged no-action letter.

The court noted that “Section 25 of the Securities Exchange Act of 1934 authorizes ‘[a] person aggrieved by a final order of the Commission’ to obtain review in certain United States Courts of Appeals. But the Commission—which generally acts through a vote of the majority of its five commissioners, has issued no order concerning this matter, final or otherwise. Nor do the informal staff views in the Kroger letter represent such an order. To be clear, the no-action letter was issued by SEC staff as guidance. And by rule and function, such staff statements ‘do not constitute an official expression of the Commission’s views,’ much less an order.”

The court emphasized that an SEC no-action letter does not bind the company, shareholder proponent, staff, or the SEC, and the SEC may, therefore, disregard such letters and proceed however it deems appropriate. Acknowledging that courts and companies may view no-action letters as “persuasive,” the court stressed that “persuasive does not equate to precedential.”

The court also rejected the center’s request to apply an expansive reading to “final order” and find the no-action letter reviewable under the Administrative Procedure Act.